Post-Brexit, Germany became the economic powerhouse of the European Union. Before Britain left the EU, Germany was the financial center with its booming automotive industry. Big global players like BMW, Volkswagen, Adidas, Daimler, and Heckles are Germany-based companies. Germany has produced so many corporate giants, but the living situation of an ordinary German citizen is better than the rest of the world. In 2020, Germany’s GDP per capita was around $45k, four times Earth’s average GDP per capita. This data is enough to understand that at this moment, Germany is one of the few developed countries in the world.
To handle such a large economy, they need a powerful tax system. A good tax structure with an effective subsidy is vital for a country’s development. Without a good tax, the structured country might get itself into various crises; problems like sovereign default, income inequality, money laundering, and inflation would arise. It is crucial to place an effective tax structure to cultivate wealth for the nation by collecting tax and using it to create infrastructure and help those who cannot earn by themselves.
TAX STRUCTURE OF GERMANY
Whether you live in Germany or plan to move there, it is essential to understand how the tax system works there.
Without any knowledge about finance and taxes, you will be doomed. So here’s a few basic things you should know before starting living in Germany.
- You are subjected to pay taxes on every penny you earn.
- At the end of the year, you might be eligible for a refund.
- In Germany, Income Tax, also known as the “Lohnsteuer”, generates more than 30% of the Government’s revenue.
- Your employer will only calculate the amount of tax you have to deduct, so if you are entitled to any refund, you have to claim it by yourself before 31st December.
- Other incomes like payment for services, rent from property comes under “Einkommensteur”, which is taxable income.
DIFFERENT TYPES OF TAX
- Income Tax: The minimum taxable income in Germany is around 9169 euros. If you earn anything under that, there is no need to pay taxes. The minimum tax rate is approximately 14%, and the rate for the highest earner who earns more than 265,327 is 45%. If you are self-employed, you have to file for your tax declaration before the deadline. If you are entitled to any refund, you have to file for that before the deadline, which is 31st May.
- Value Added Tax: Mehrwertsteuer is also charged on non-essential products and services in Germany; the usual VAT rate is around 19% for most of the products except for books and flowers. The VAT imposed on flowers and books is 7%.
- Tax Paid on Capital Gains: The tax rate on gains like dividend, interest rate, and stock sale is flat 25%. Unlike income tax, it’s not paid at the end of the year. The tax applies to the gross profit, not the net profit.
- Solidarity Tax: As per Steuerberatungskanzlei Solidarity Tax or Solidaritaetszuschlag is a payable amount that every individual who earns above 1000 Euro has to pay. Solidarity Tax’s introduction was to help with the finance of East Germany after the fall of the Berlin Wall in 1991. The tax is still in place, and the tax rate is around 5.5%; Solidarity Tax and Income tax is too different.
- Church Tax: Kirchensteuer or church tax, Christian or Jewish parishioner members pay this tax. The church Tax rate is around 8-9%.
HOW TO FILE FOR TAXES
In Germany, its citizens and foreigners coming to the country for research or other reasons have to pay taxes and file for it themselves. If you’re employed, your employer might file taxes for you but if you are self-employed or freelancing, filing taxes is your responsibility. In Germany, the tax year aligns with the calendar year, which means that the deadline for paying tax is 31st December.
The German Government does not tax foreigners who belong to a specific country and pay taxes to their home country; if someone gets a job in their home country then gets posted in Germany, they don’t need to pay the German Government any taxes. This is to counter double taxation; as Germany has entered treaties with various countries that individuals working in Germany will pay taxes to their home country for two years.
IDENTIFICATION NEEDED TO PAY TAXES
You will need a personal identification number or the Steuer id. Everyone has an id with a unique number; this id will be there in your name for the rest of your life. The tax office will identify you with your id number. If you are self-employed or freelancing, you will also need a document called Steuernummer. Before starting your career, you have to get a Steuernummer issued by the tax office.
6 CLASSES IN THE GERMAN TAX SYSTEM
- Unmarried or Separate. Married people not belonging to Class ii, iii, iv.
- Single Parent.
- Married but sole earner of household or spouse does not earn taxable amount.
- Married and both make and live in Germany.
- A person who works two or more than two jobs.
- Married but one partner makes significantly less than the other but earns a taxable amount.
FILING FOR TAX RETURN
You have to file for a tax return before 31st July; afterward, your tax return application will be reviewed, and if you are eligible for a tax return, the tax department will issue it.
TAX CONSULTANCY IN GERMANY
Filing tax can be very confusing and complicated; that’s when you need a tax advisor or steuerberater. Or you can contact a tax consultancy or the Steuerberatungskanzlei. These Consultancies are very professional and will get you the maximum return on your taxes. If you don’t pay tax properly, the tax department might go after your pension fund.
So if you don’t want your pension fund to be gone and are also confused about how the German Tax system works, then hiring a Tax consultant would be the best option for you. If the tax advisor is out of your budget, you can also hire a bookkeeper or Buchhalter. A Buchhalter cannot submit your papers; they can only fill them in for you. So you have to submit the documents yourself.
The German tax system is very strict, and the citizen has to pay a considerable part of their salary to the taxes. But it is necessary for the country to run smoothly; the German Government offers a lot in welfare like free education and healthcare. Many people worldwide come to Germany as the colleges don’t charge tuition like other countries.